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Classify events as either an adjusting or non-adjusting

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Reference no: EM132508439

You are the financial accountant for Hippy Ltd. Whilst finalising the financial statements for the reporting period ending 30 June 2020, the following events have been brought to your attention:

  1. At 30 June 2020, Jolly Ltd owed Hippy Ltd an amount of $250,000. On 28 July 2020, you received a letter from a liquidator advising the bankruptcy of Jolly Ltd. The letter indicated that Jolly Ltd ceased trading in June 2020 and that Hippy Ltd is likely to receive a liquidation distribution of 15 cents in the dollar. Hippy Ltd generally provides a blanket allowance for bad debts of 5% for all accounts receivable.
  2. On 30 June 2020, Hippy Ltd had a long term loan receivable (non-current asset) denominated in Hong Kong dollars of HK$3,000,000. The loan was translated at the reporting rate of A$1.00 = HK$4.92 and recorded as A$609,756 in the accounts. Due to the continuing political issues in the country, the HK dollar had a huge fall immediately after the reporting year. The average exchange rate for July 2020 is A$1.00 = HK$5.50. Using this average rate, the Australian dollar equivalent of the loan receivable would have been reduced to A$545,455 immediately after the year-end.

You are to assume that both the events above are material and occurred prior to the financial statements being authorised for issue. Ignore any tax effect.

Required:

Question 1: Classify the events as either an adjusting or non-adjusting event after the end of the reporting period. Justify your classification and make reference to AASB110, where relevant.

Question 2: Base on your answer to (i) above, prepare the necessary journal entries or note disclosures to comply with the requirements of AASB110. Note: Narrations are not required for all journal entries.

Reference no: EM132508439

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